Why the property market just slipped below a key benchmark

The auction market in Sydney and Melbourne was weaker than expected in February, as concerns about rate hikes and inflation weighed on investors and lifestyle buyers.

The auction clearance rate, a key indicator of the health of the property market, was 67.3 per cent in Sydney, and 67.6 per cent in Melbourne in February, on Domain data.

February generally sees a seasonal bounce, with auctions starting up again in earnest after Australia Day, following tapering off in December for the holiday period.

But the clearance rate has come in below the key 70 per cent threshold that indicates upbeat price growth. A result of 60 per cent is generally seen as a balanced market: if the rate is above 60 per cent, prices are likely to rise, if below, they’re likely falling. On this measure, prices are likely to keep rising, but not boom.

Dr Nicola Powell, chief of research and economics at Domain, said the slower start to the year probably reflected a cautiousness from buyers around the risk of further rate hikes and confidence in their ability to borrow.

“We’re all scarred from this period of high inflation, high cost of living, and the learnings that we all had through the last rate-hiking cycle,” she said, noting these factors could set the tone for the year.

“We are in a rate-hiking period, and that will have an impact on buyer sentiment: how much they’re willing to spend and the type of home that they’re willing to sink their money into.”

The Reserve Bank increased the cash rate to 3.85 per cent at its February meeting, and is due to meet again on March 17.

Senior economist at Westpac Matthew Hassan thought February’s clearance rate could have been higher without the rate rise.

“I think the biggest warning here is that February is usually a seasonally strong period,” he said. “Perhaps, in the absence of the RBA move, we would have had a 70 per cent clearance rate [in both cities].”

Hassan said that Sydney and Melbourne markets had already been slowing, whereas Adelaide, Brisbane and Perth had all seen more robust growth in the past year. Separate data from Cotality showed Sydney and Melbourne home values were flat in February.

The clearance rate is closely watched as a leading indicator of price growth. It is calculated by taking the number of successful sales and dividing by the total number of auction results reported to researchers by deadline. Domain uses a weekly figure to catch auctions not held on Saturdays.

“We expect that interest rate increases will significantly dampen markets this year,” Hassan said, “taking the heat out of those stronger markets, and weighing on Sydney and Melbourne.”

But as both Powell and Hassan caution, this doesn’t mean prices are likely to go down.

“But we know that price momentum is likely to start slowing,” Powell said.

The market has been shifting to more affordable options for some time. For example, Powell noted unit prices rising faster than house prices in Sydney.

Suburban family homes have been less affected by the rate worries.

At a regional level, Powell noted that the Melbourne areas with the strongest clearance rates in February were in the middle-ring, where owner-occupier families tended to be more motivated by a need to buy.

“I think there’s an element of affordability there,” she said. “The premium markets, which are in the inner east, are seeing a lower clearance rate, as are lifestyle markets like the Mornington Peninsula.”

For Sydney, the picture was obscured by the “auction-heartlands” of the city and inner south and eastern suburbs regions, she said.

But while clearance in these areas is generally higher – with fewer homes, and a larger percentage going to auction – owner-occupier family regions like Parramatta, and Baulkham Hills and Hawkesbury, grew strongly in February despite an overall weaker market.

“I do think that this is that kind of owner-occupier, family demand. It’s not necessarily as investor driven [as other areas],” she said.

While rate hikes might have a more immediate impact on buyer expectations, global factors like the Iran war could also play into buyers’ caution in the coming months.

“Ultimately, if it means that it impacts supply chains for oil, which it’s going to do, it is going to impact everything,” Powell said.

“The RBA and the government are going to be very much focused on the war in the Middle East.”

Hassan said it was too early to tell whether the conflict would factor into buyers’ decision-making.

If it does, it might result in more cancelled auctions and a cautious shift to private sales, rather than a significant change in the clearance rate, he said.

“I think that can tell you when uncertainties really come in,” he said. “That comes back to fewer buyers, rather than concerns about clearance rates.”